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The History of Gold Markets and Prices

It is interesting to note that the gold futures market is one of the smallest- volume markets in the world. Because it is so small, it can be extremely volatile when exposed to massive short-sale activities. The short position in gold, via derivatives, is the one of the larger positions in the world.

As shown in the gold price chart in Exhibit 5.8, the price of gold stayed relatively stable (and in some periods declined) between the early 1980s and 2005. This has been mainly due to the central banks of many of the worlds' countries selling their gold on paper, and using many commodity-trading techniques. In one of these techniques, called gold carry, gold is borrowed (on paper and not physically) from the central banks (of mostly third-world countries) at a low interest rate and is used to flood the market to keep the price down or short gold and make money both ways.

Major players have included hedge funds and central banks of major industrial countries and some oil-producing countries, in addition to investment banks and other private banks. As the chart shows, gold prices stayed at $35 per ounce before August 15,1971, when the official convertibility of gold into dollars was in force. Exhibits 5.9 through 5.12 also indicate that gold is currently overpriced in terms of coal, oil, rice, and wheat.

Setting the Market Price of Gold: Gold Price Fixing

The world center of gold trading is London at the London Bullion Market, operated by the London Bullion Market Association (LBMA).

The practice of fixing gold prices began in 1919. It continued until 1939, when the London gold market was closed as a result of World War II. The market was reopened in 1954. When the central bank gold pool began officially in 1961, the Bank of England (as agent of the pool) maintained an open phone line with N. M. Rothschild during the morning

Price of Each Ounce of Gold in Dollars

Gold Prices, 1968-2013

EXHIBIT 5.8 Gold Prices, 1968-2013

Price of Each Ounce of Gold in Barrels of Oil

Price of Gold in Terms of Tons of Coal

EXHIBIT 5.9 Price of Gold in Terms of Tons of Coal

Price of Each Ounce of Gold in Barrels of Oil

Price of Gold in Terms of Oil

EXHIBIT 5.10 Price of Gold in Terms of Oil

Price of Each Ounce of Gold in Hundredweight of Rice

Price of Gold in Terms of Rice

EXHIBIT 5.11 Price of Gold in Terms of Rice

Price of Each Ounce of Gold in Bushels of Wheat

Price of Gold in Terms of Wheat

EXHIBIT 5.12 Price of Gold in Terms of Wheat

fixing (there was as yet no afternoon fixing). The objective was to fix the price around the $35/ounce price (as per the Bretton Woods Agreement) within a 1 percent band. In its current form, the London gold price fixing takes place twice each business day, at 10:30 a.m. and 3:00 p.m., in the Fixing Room. Five individuals representing each of the following banks sit at the fixing table:

■ Bank of Nova Scotia in Canada, Scotia-Mocatta — successor to Mocatta & Goldsmid and part of Bank of Nova Scotia

■ Barclays Capital — Replaced N. M. Rothschild & Sons when they abdicated

■ Deutsche Bank — owner of Sharps Pixley, itself the merger of Sharps Wilkins with Pixley 8c Abell

■ HSBC — owner of Samuel Montagu & Company

■ Societe Generale

Price fixing is based on balancing supply and demand. Usually, the fixing takes less than 15 minutes. In 1979, when the Islamic Revolution of Iran erupted, the afternoon fixing lasted an hour and 39 minutes, due to price volatility.

 
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